• Why Investor Relations?

    For more than 40 years, the CFA Institute has advocated for efficient capital markets that are ethical, transparent, and provide investor protections. One of the Institute’s guiding principles states: “Investors need complete, accurate, timely and transparent information from securities issuers.”

  • Why InsuranceIR?

    Insurance companies face unique challenges when communicating with investors and InsuranceIR is uniquely suited to help with industry-specific support.

    The primary purpose of this blog is to offer specific ideas on how insurance companies can achieve that objective.

    The supporting pages offer information on InsuranceIR's capabilities and how firm principal Heather J. Wietzel can help your company improve your investor communications.

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  • Copyright 2012

Say-On-Pay Reputation Risk for Insurers

(Actually, the potential for reputation risk may exist for all publicly traded companies with investment operations, but there may be different aspects to take into consideration for different industries.)

As has been widely reported, the SEC yesterday finalized its rule titled “Shareholder Approval of Executive Compensation and Golden Parachute Compensation,” better known as Say On Pay. The entire 152-page rule is available here, and the SEC’s summary and fact sheet here. Law firm WilmerHale has posted one of many available summaries here.

The rule affects companies in every industry; insurance companies aren’t treated any better, or any worse, although smaller reporting companies are exempt until 2013.

But there’s one interesting twist for companies that file 13-F reports with the SEC regarding the holdings in their investment portfolio.  The Dodd-Frank Act required those 13-F filers — a classification that includes most insurance companies — to annually disclose how they voted on say-on-pay and golden parachute matters for holdings in the portfolio.

Although the final rule issued yesterday does not yet address this requirement, I encourage insurance companies to keep this in mind as proxies are voted by their investment operation. I have seen one report that the SEC indicated in their open meeting yesterday that they would address this topic in the coming month.

This rule could expose insurance companies to “reputation risk” if their investment team votes proxies for say on pay in a fashion out of line with the board and management’s stance on the company’s own corporate governance.  I suspect the most likely disconnect would reflect a company:

  1. Recommending to its shareholders that say-on-pay voting occur every three years while
  2. Voting proxies for holdings in its portfolio for say-on-pay voting to occur every year, regardless of the recommendations made by the respective companies’ boards.

It’s akin to “do as I say, not as I do.”  It will be interesting to see how the SEC shapes these reporting rules.

The Missing Link … at least for SEC filings and other investor communications

My corporate and consulting experience makes it hard for me to imagine serving in an investor relations capacity without taking a significant role in shaping the strategic content of the written/electronic materials that are directed at the investor audience (ranging from the SEC filings, e.g., 10-Ks ,10-Qs and proxy, to earnings releases, fact sheets, website materials, presentations, and more). Even the best IRO can talk or meet with only a subset of current and potential investors, many more learn about the company or stay up-to-date via written/electronic materials.

I know that including SEC filings on my list of key documents distinguishes me from many of my peers, but I firmly believe my view is bolstered by SEC commentary on the topic, as I’ve noted in previous posts.  The filings also are very important to the board and senior management (and are closely scrutinized by investors).

But I also know that convoluted processes make it very difficult for IROs to participate in everything that needs their attention on a strategic level, particularly the SEC filings.

I learned a few days ago about a possible solution – a simple, relatively inexpensive tool from WebFilings – that I think is the “missing link” to solve a long list of corporate disclosure process problems, including IR participation in the SEC filings.  (Note that I have no business relationship with WebFilings although they have been kind enough to give me a product demo and some background information.) Continue reading

Why Bother, It’s Just the 10-K?

A University of Michigan study published in September is making a very strong case for companies to focus on the readability of their 10-K. (The Effect of Annual Report Readability on Analyst Following and the Properties of Their Earnings Forecasts)

The study draws the conclusion that:

“… Our overall findings that lower readability is associated with greater levels of analyst coverage, effort, and information content, but with lower accuracy, higher dispersion, and greater uncertainty of their earnings forecasts complements and contributes to the literature on how analysts respond to firms’ disclosure. … “

Adding investor relations to a company’s 10-K “team” is one of the most obvious ways to close the readability gap, while accomplishing other important objectives. Investor relations practitioners should know the strategic message. They also should be experienced at making complex financial topics understandable and putting them in context.

In a July post, I noted:

“One of the best opportunities companies have to create efficiencies in the communications process is by being consistent — making strategic use of their required (and time-consuming) SEC filings and leveraging that time to simplify development of other communications. Plus, investors read the SEC filings, and trade on the information they contain. Investors rely on the filings whether or not those documents share the strategic messages contained in presentations, news releases and other written and verbal communications.”

That July post (SEC Stresses Consistency) also transcribed comments on this topic by Meredith Cross, Director, SEC Division of Corporation Finance.

Newsflash: SEC Removes Exemption for Credit Rating Agencies from Regulation FD

Earlier today, the SEC issued the final rule removing the Reg FD exemption for “nationally recognized statistical rating organizations and credit rating agencies for the purpose of determining or monitoring credit ratings.” The commission did not ask for comments before issuing a final rule because the change was required by Regulation FD Dodd-Frank.

The full text is available on the SEC’s website at Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The rule does not make any specific comments on financial strength ratings vs. credit ratings, which means insurance companies should be prepared to function under this rule in the short term, even if the commission makes some clarification in the future.  I discussed some of the potential ramifications in an earlier post.

Looking Forward vs. Earnings Guidance

In yesterday’s post, I talked about the importance of looking forward in communications with investors. It occurred to me that a brief clarification would be useful.

All investors are evaluating the future potential of companies they are considering, whether or not the management talks specifically about the future. For property casualty insurance companies, investors want to understand how the company will increase book value over time, which means they need to assess the outlook for both insurance operations and the investment portfolio.

I believe management greatly improves an investor’s ability to assess the future by:

  • Articulating the strategic initiatives being employed to position the business for success
  • Discussing the best and worst case scenarios envisioned under the plan and
  • Providing interim updates on metrics used internally to assess progress

As one example, I encourage you to look at the investor communications made available by RenaissanceRe Holdings Ltd. In my view, they do an excellent job presenting their business strategy. (Note: I am using RNR as an example because I do not have a relationship with the company.)

While articulating management’s vision provides important insight for investors, it is entirely distinct from providing “earnings guidance,” or specific targets for selected financial measures. (Targets are most commonly given for net and operating income as well as for key earnings drivers such as the premium growth rate and the combined ratio.)

In my opinion, providing earnings guidance is actually less valuable to investors than insightful qualitative information. This view was supported by investor comments in Rivel Research’s “2009 Perspectives on the Buy-side,” which noted:

“Indeed, guidance is now more about intangibles and effective, clear communications than it has ever been before – showcasing the persuasive importance of transparency. Providing qualitative insights into the business strategy is the kind of guidance which reigns supreme during the present market turmoil, outranking revenues, margins and earnings.”

Finally, the SEC has long encouraged companies to look forward in their communications.  For example, in an extensive Interpretative Release issued in 2003, the commission said:

“Throughout MD&A, including in an introduction or overview, discussion and analysis of financial condition and operating performance includes both past and prospective matters. In addressing prospective financial condition and operating performance, there are circumstances, particularly regarding known material trends and uncertainties, where forward-looking information is required to be disclosed. We also encourage companies to discuss prospective matters and include forward-looking information in circumstances where that information may not be required, but will provide useful material information for investors that promotes understanding.”

Rating Agencies To Lose Reg FD Exemption?

As Fitch noted earlier this week, one provision of Dodd-Frank instructs the SEC to remove the exemption from Regulation FD for “entities whose primary business is the issuance of credit ratings” within 90 days of the “enactment of this sub-title” (SEC. 939B).

Click for my September 29, 2010, update post

Insurance companies should be concerned about this potential change for important business reasons, but there also are investor relations implications. (Because of the role of financial strength ratings, insurance companies interact with rating agencies at least as often as they do with sell-side analysts actively following the company. The depth of information provided to the rating agencies is substantially greater.)

Investor relations often is integral to monitoring Reg FD compliance with investor audiences but does not necessarily have a primary role in ratings agency communications for insurance companies.

I’m sure legal groups will be talking about this provision soon (in great detail).  In the meantime, here are a few considerations from the investor relations viewpoint.

  • Will companies want IR to sit in on conversations/meetings with rating agency representatives to monitor for unintentional disclosures?
  • If management cannot make “alert” calls to ratings agency analysts prior to key announcements, who will devote time to those calls in the hours after the release is issued?
  • What role does IR take in the development and review of the lengthy (100+ slides) decks used for rating agency presentations and of the responses to various questionnaires and other rating agency inquiries?

I am very interested in any thoughts my readers might have on this topic.

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SEC Stresses Consistency

I’ll admit I have a tendency to obsess about ways investor relations can leverage time already being invested by a company in other activities. I look for these opportunities because management time is a limited commodity, particularly at smaller companies. And it is at those smaller companies where management involvement in investor communications is most critical.

One of the best opportunities companies have to create efficiencies in the communications process is by being consistent — making strategic use of their required (and time-consuming) SEC filings and leveraging that time to simplify development of other communications. Plus, investors read the SEC filings, and trade on the information they contain. Investors rely on the filings whether or not those documents share the strategic messages contained in presentations, news releases and other written and verbal communications.

I nearly jumped up and down for joy at NIRI’s National Conference when consistency (and IR’s appropriate role in SEC filings) was highlighted in the keynote address given by Meredith Cross, Director, Corporation Finance.

But rather than editorialize, below is a transcription of a section of Director Cross’s speech.  The excerpt includes her segue into the use of non-GAAP data, which is a topic of particular interest to insurance companies.

At the beginning of her remarks, she included the normal SEC disclaimer that these were her beliefs, not necessarily those of the commission.

Follow the link to read what Director Cross said on consistency: Continue reading